June 29, 2007    Volume 14, No. 12

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Patent 'Reform' Is Anything But


Ironically, Congress is now threatening China with harsh remedies if it does not quickly stiffen its patent protections, even as Congress marks up legislation that will dramatically weaken U.S. patent protections. This bill is the Patent Reform Act of 2007.

This schizophrenic policy is being driven by group of "Big Tech" transnational corporations that repeatedly infringe the patents of others, get sued, lose in court and are then forced to pay billions of dollars in penalties. Now, in response, they are financing an expensive lobbying, propaganda and legal campaign to weaken U.S. patent laws by passing this Patent "Reform" Act. They cleverly call themselves The Coalition for Patent Fairness (CPF); included are large transnational corporations such as Adobe, Microsoft, Cisco, Intel, eBay, Lenovo, Dell and Oracle.

During the period 1993-2005, four of the CPF companies paid out more than $3.5 billion in patent settlements. In the same period, their combined revenues were $1.4 trillion, making their patent settlements only about one-quarter of one percent of their revenues. Now, they wish to reduce even those costs, not by changing their obviously unfair, and often illegal, business practices, but by persuading Congress, and also the Supreme Court, to weaken U.S. patent protections.

These corporations have convinced many members of Congress and many editorial writers that the U.S. patent system is badly broken and that it requires a major legislative overhaul. Supposedly, they say, the U.S. is in the midst of a "litigation crisis" where responsible corporations (CPF members) are being penalized by unworthy lawsuits. And, also supposedly, the United States Patent and Trademark Office (USPTO) is issuing massive numbers of unworthy patents that are being used in lawsuits against innovative companies (again, CPF members).

The "litigation crisis" and "unworthy patents" allegations simply do not hold up under examination.

The real facts of the so called litigation crisis are that for the past two decades the number of patent lawsuits commenced annually has been about 1.5 percent of all patents granted. In 2006, it was 1.47 percent. This is business as usual. Most patent lawsuits, moreover, settle before trial. In 1979, some 79 percent of patent cases settled before trial, while in 2004 almost 86 percent did. Matters are actually improving.

Also, the U.S. has few patent trials. For instance, in 2001 only 76 patent lawsuits were tried and only 102 went to trial in 2006. By no measure can 102 patent trials be considered a national litigation crisis. The annual report of Federal Judicial Caseload Statistics, which is on the Internet, provides the factual antidote to false claims of a litigation crisis (www.uscourts.gov/ caseload2006/contents.html).

As to the massive numbers of "unworthy patents" argument, the real-world test is how many patents are challenged and the outcome of those challenges. Between 1981 and 2006 the USPTO issued more than 3.1 million patents. In that period, 8,600 were challenged at the Patent Office through inter partes and ex parte reexaminations. The number challenged amounts to less than three-tenths of one percent. Of those challenged, about 74 percent resulted in claims narrowed or cancelled. In addition, almost 60 percent of the relatively few patents challenged in a court trial are sustained.

My point is that the USPTO's work is certainly not perfect, but the Patent Office is also not pouring out a stream of bad patents.

If there are no patent "litigation crisis" and no patent "quality crisis," what is the real purpose of the Patent Reform Act of 2007 legislation before Congress?

A main goal is to legislate changes that will reduce penalties paid by infringers. Under existing law, a patent holder who is infringed upon is entitled to damages adequate to compensate for infringement, but in no event less than a reasonable royalty. The courts now consider a list of 15 factors in that calculation, including apportioning the part of the realizable profit created by the infringed invention versus other factors such as the manufacturing process, promotion, sales or other patents owned by the infringer.

Under this bill, however, Congress mandates that the court "ensure that a reasonable royalty is applied only to the economic value properly attributable to the patent's special contribution over the prior art" while only allowing the consideration of the other 14 factors. The bill goes on to require that the court subtract from the analysis "the economic value properly attributable to the prior art, and other features or improvements, whether or not patented that contribute economic value to the infringing product or service." Think of this as a big finger on the scales of justice that favors the infringer.

Often, the infringed component is only one of dozens of parts and contributions that make up the product, but that component may be the very thing that makes the product sell.

JBL infringed Bose's patented port tube technology, for instance, which gives Bose speakers their distinctive clarity. Bose's technology vastly improved the sound of the JBL speakers and drove JBL's sales. Bose sued and won. JBL wanted the royalty determination based on the small value of a cheaply made, plastic port tube. The federal court, however, determined that Bose's technology is what drove JBL's sales and set the damages on the value of the entire speaker system. If the damages were apportioned only to the cost of making the port tube, Bose would have received a tiny fraction of what its invention was worth. If JBL were allowed to subtract the value of all prior art in the damage calculation, which this legislation would allow, Bose would likely have gotten almost zero.

Cutting the damages paid by infringers is the goal of the many serial infringers supporting this provision.

Chief Judge Paul R. Michel of the U.S. Court of Appeals for the Federal Circuit advised Congress in a letter dated June 7, 2007, that the current law on apportionment is stable, works well and is understood by litigators and judges, and that the new proposal would be a radical change that would cause great chaos in the legal system. He noted that this change would require a massive damage trial in every case and a new kind of costly macroeconomic analysis. "Resulting additional court delays would be severe," he wrote, "as would additional attorneys' fees and costs." I think that we can mark him down as opposed.

One other pernicious result is this "primary factor" apportionment provision would actually encourage more infringement. Rather than negotiate with a patent owner and pay for use of an innovation, many infringers would simply go ahead and use it, pay nothing and, if caught and proceeded against, then pay a small royalty payment eventually set by a federal judge.

If Congress enacts this provision, it is sanctioning the "taking" of a patent owner's property and drastically reducing the price, if anything, an infringer must pay. Think of it as "self-licensing" someone else's patent. During the life of a patent, copyright or trademark, there is no difference between real property and intellectual property. A patent belongs to someone. Often it has great value. The owners should decide how it is used and the terms of that use, not the infringers.

A second goal of the proposed legislation is to force the USPTO to publish on the Internet all patent applications 18-months after the date they are filed. Since most patent applications now take on average 31 months to process, the Big Tech corporations that are sponsoring this legislation would get an advanced peek at an applicant's secrets more than a year before the inventor has patent protection, that is, if the patent is even granted, which for half of all applications, it is not. If an infringer took those secrets to China or India or anywhere where patent protection is lax, as many would, the inventor's only recourse would be to go to those countries and file a lawsuit. Few small companies, universities and inventors can afford this.

Foreign pirates find this mandatory publication provision particularly useful. For China, South Korea and many other nations, the USPTO's computer in Arlington, Va., is their primary source of R&D. Many foreign corporations and governments fill a room with computers, engineers and fast Internet connections and then task them with finding new technologies in unprotected U.S. patent applications. The U.S. isn't the only country with this problem; the Japanese Patent Office reports their computers get 17,000 hits per day from China and 55,000 hits per day from South Korea.

When Congress first enacted this 18-month publication requirement in 1999 it also created a loophole. Inventors can opt-out of having their applications published if they agree not to file for any foreign patents. About half of all applications from small businesses, universities and independent inventors select to opt-out. The proposed bill would eliminate this opt-out choice.

The Big Tech corporations also want Congress to change the long-standing practice of the U.S. Patent Office of granting a patent to the first-person-to-invent to the practice used in Europe, Japan, China and elsewhere where the patent goes to the first-person-to-file the patent application.

A first-to-file system strongly favors big corporations, who have the resources to track every aspect of an invention and file boxes and boxes of materials to support their claims, over small businesses, independent inventors and universities, who do not.

Equally important, this change of systems would create chaos at the USPTO and greatly contribute to the slowing of U.S. innovation. The USPTO would have to create numerous new forms and procedures and retrain its thousands of patent examiners and administrative people, even as it works down a backlog of 750,000 applications. All inventors, companies, patent lawyers and federal judges in the U.S. would be forced to learn this new system, its procedures and rules.

The turmoil created by this shift in the already beleaguered USPTO would guarantee a logjam there -- one far greater than the passport backlog fiasco now underway at the State Department.

Incongruously, this legislation also proposes to solve America's supposed patent "litigation crisis" by creating a new forum for more litigation. This proposed "post grant" opposition process provides an infringer a low-cost means to challenge the very patent it is infringing and allows it to do so over the entire-20 year life of the patent at a lower burden of proof than required in a federal court.

Europe has the very system that Congress is being asked to copy. It is a litigation heaven for the patent bar. The annual European Patent Office (EPO) challenge rate was 5.4 percent of granted patents in 2005. The combination of all USPTO ex parte and inter partes challenges, all interference cases, plus all patent lawsuits commenced calculated as per the number of patents granted produces a comparable U.S. challenge rate of 1.8 percent. The EOP challenge rate is three times that of the United States and that does not count any patent lawsuits in Europe.

Japan dropped this system in 2004 because it created too many lawsuits. Of the many bad ideas in this legislation, this post grant litigation process is probably the worst.

The principal victims of these and other Patent Reform Act of 2007 proposals will be small entity inventors -- small businesses, individual inventors, universities and non-profit research organizations. Their patents are often the greatest, if not only, assets they hold. Most often, they need ownership of an unchallenged patent in order to get financing to actually develop it. And, when their patent secrets are stolen and used by larger infringers, they are generally unable to finance a lawsuit, particularly if the infringer operates outside the United States.

Yet, it is small entity inventors who file almost 30 percent of all U.S.-origin patent applications and receive 31 percent of all patents granted. Unlike the Big Tech companies, most of these innovators keep their R&D and production in the U.S. They are vital to America's future. But they are fragile. Special consideration of their situation and needs is in the nation's best interest.

Fortunately, many U.S. groups and organizations oppose the Patent Reform Act of 2007. Included are the National Association of Manufacturers, the U.S. Business and Industrial Council, more than 450 venture capital firms, the Big Ten universities, plus dozens of other organizations. The Department of Commerce and the USPTO have written Congress that they do not support eliminating the 18-month opt-out rule, changing to a first-to-file system, altering the apportionment provision or creating a new litigation forum. Unfortunately, all this opposition has mattered little so far and this dangerous legislation is still moving forth in the House and Senate Judiciary Committees.

Each Member of Congress needs to closely examine the Patent Reform Act of 2007 for it will deeply affect every state, every community and every congressional district. We face a historic economic challenge in the global economy. Now is the time for Congress to strengthen U.S. patent protections rather than weaken them.

-- Pat Choate is the author of "Hot Property, The Stealing of Ideas and the Age of Globalization" (Knopf 2005) and several studies on intellectual property issues. He is completing a book on globalization that will be published in Spring 2008. He can be reached via e-mail at manufacturingpolicyproject@gmail.com.

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